'Sin taxes' are meant to push people away from booze and cigarettes, but they mostly hit those who can least afford to pay

• "Sin taxes" are mostly paid by those struggling the most economically, according to a new paper.
• Just 10% of households pay roughly 80% of the taxes on goods like alcohol, cigarettes, and soda.

"Sin taxes" helped wean the US off of some bad habits. They now leave a small group of less educated and low-earning Americans with most of the bill.

The US has a long history of taxing vices, with Alexander Hamilton proposing to tax alcohol in the Federalist Papers. Today, these sin taxes cover goods like liquor and tobacco as well as more modern indulgences like soda. Modern sin taxes aim to raise the price of undesirable goods and services, nudging consumers away from them to boost overall public health.

They're growing, too. The median tax on cigarettes more than quadrupled from 2000 to 2021, and House Democrats proposed doubling the federal tax on cigarettes in their 2021 reconciliation package.

Yet rising sin taxes might not be the easy moneymaker politicians hoped for. Just 10% of households account for 80% of sin tax revenue, according to a paper from economists Christopher Conlon, Yinan Wang, and Nirupama Rao published by the National Bureau of Economic Research. The taxes might not target specific income groups, but the people stuck paying them are largely those who can least afford them.

"Saying 'sin taxes are regressive' or 'sin taxes are progressive' largely misses the point," the team said. "There is much more variation among households within income groups than across them in purchases of sin goods."

The group studied clusters of people who pay the most in sin taxes, ranging from those who spend on only alcohol, cigarettes, or sugary drinks to those who spend on all of them. Households in the "everything" and "smokers" clusters already pay 1.5% to 2% of their yearly income in sin taxes, according to the paper. They're also much more likely be from the lowest levels of income and education, as well as in the 55 to 64 age range.

These two clusters alone pay 68% of the country's sin taxes, yet they only comprise 8% of US households, according to the paper. Before hiking tax rates higher, policymakers should consider whether higher rates would actually cut down on the purchases of such goods, or if they'd simply place an even larger economic drag on an already disadvantaged group, the team said.

Heavy drinkers pose another sin-tax problem

The paper also noted that not all sin-tax payers are low earners or poorly educated. The cluster of non-smoking "heavy drinkers," is disproportionately comprised of people from the highest income and education groups, according to the economists.

Yet this group's habits create another problem for policymakers. The cluster and the "everything" group should be the source of the most external damage like drunk driving or domestic abuse, since alcohol consumption is closely tied to these negative events. Put simply, the idea is that higher taxes on alcohol lead to lower levels of drinking, which should have pretty good social outcomes.

But targeting alcohol taxes is a bit trickier than taxes on other vices. Where heavy drinkers tend to buy alcohol in many forms, those in the "everything" group tend to buy mostly wine and beer.

The diversity of alcohol sources purchased by heavy drinkers throws a wrench in policymakers' aim to curb consumption, the team said. The government's policy of taxing distilled spirits at a higher rate than beer and wine might work in areas where the heaviest drinkers mainly buy spirits, but the policy is far less effective in areas where they'll purchase alcohol in a range of forms. It also makes it harder to increase sin taxes on products preferred by people with the highest chance of enacting external damage, they added.

Raising sin taxes, then, isn't as simple as politicians often make it out to be. The policies affect only a small sliver of the US population, and many in that group face overlapping burdens from a variety of sin taxes. And despite being created to cut down on dangerous behavior, gaps in the policy could keep the taxes from accomplishing that very goal.